UPI Merchant Charges – Rationale & Impact – Explained Pointwise

The government has recently introduced a 0.4% Merchant Discount Rate (MDR) on specified UPI payments to merchants above ₹2,000, while keeping person-to-person transactions and most small-value merchant payments free. The move seeks to strengthen the long-term sustainability of the UPI ecosystem, but also raises concerns regarding digital-payment adoption and financial inclusion.

What is the recent government decision regarding charges on UPI transactions?

• The Government of India and the National Payments Corporation of India (NPCI) decided to apply a new Merchant Discount Rate (MDR) framework for Unified Payments Interface (UPI) transactions, effective October 15, 2026.
• Earlier, in August, Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026 during the Monsoon Session, amending Section 10A of the Payment and Settlement Systems Act, 2007. The amendment doesn’t itself impose any fee, but it allows the government to notify a Merchant Discount Rate (MDR) on certain electronic payment modes going forward.
• Under the new MDR framework:
  • 0.4% MDR will apply to specified Person-to-Merchant (P2M) UPI transactions above ₹2,000.
  • For transactions of ₹75,000 or more, the MDR will be capped at ₹300 per transaction.
  • Person-to-Person (P2P) UPI transactions will remain completely free, irrespective of the amount.
  • Merchant payments up to ₹2,000 will remain free. 
  • Small merchants receiving up to ₹1 lakh per month through UPI QR codes will continue to enjoy zero MDR. Over 96% of all merchant transactions fall into these free categories.
  • In sectors such as railways, telecom, insurance, fuel and agricultural inputs, transactions above ₹2,000 will attract a flat ₹5 MDR.
• The government has clarified that MDR is a merchant-side charge, not a fee collected from consumers by the government. Banks have been advised to prevent merchants from passing it on to customers.

What are the major reasons behind this decision?

1. Ensure long-term sustainability of UPI: UPI has expanded to a very large scale, creating continuing costs for payment infrastructure, operations and technological upgrades. A revenue stream is intended to make the ecosystem more financially sustainable.
2. Support payment infrastructure: MDR revenue will be distributed among ecosystem participants such as banks, payment service providers and UPI application providers, helping them maintain and expand payment infrastructure.
3. Encourage wider expansion of UPI: The government intends that the revenue model should support further expansion of UPI, particularly into rural and semi-urban areas. Moreover, a predictable revenue model can encourage banks and payment platforms to continue onboarding merchants and developing UPI-based services.
4. Reduce dependence on government-funded incentives: Until now, UPI transactions have largely been subject to zero MDR, limiting the direct revenue earned by banks and payment service providers from many UPI payments. The government therefore provided financial incentives to compensate ecosystem participants for promoting low-value UPI transactions. The new framework will create a direct revenue stream within the payment ecosystem, thereby reducing reliance on budgetary support.
5. Fund cybersecurity and fraud prevention: The rapid growth of UPI transactions has increased the need for stronger cybersecurity, fraud detection and prevention mechanisms. Revenue generated through MDR can help payment ecosystem participants invest in real-time fraud monitoring, secure payment infrastructure, data protection, authentication systems and faster response mechanisms.
6. Maintain affordability while creating revenue: Rather than applying MDR universally, the government has limited it to specified P2M transactions above ₹2,000, while keeping P2P payments and most merchant transactions free. The government estimates that about 96% of P2M transactions will remain unaffected.
7. International expansion: A financially sustainable domestic ecosystem can also support India’s efforts to expand UPI’s interoperability and acceptance in other countries, strengthening India’s digital-payment footprint.

What are the likely impacts of introducing merchant charges on UPI transactions?

Positive Impacts:

1. Improved financial sustainability: New MDR framework can create a more sustainable revenue stream for participants in the digital-payment ecosystem. It can help banks & payment service providers recover part of the costs associated with maintaining payment infrastructure, cybersecurity, fraud prevention and technological upgrades.
2. Greater investment in infrastructure: Revenue generated through merchant charges can provide payment ecosystem participants with additional resources to upgrade digital payment infrastructure. This can support improvements in transaction capacity, fraud detection, data protection and system resilience, enabling UPI to handle rising transaction volumes more efficiently and reliably.
3. Greater competition among payment providers: The introduction of MDR could create a more sustainable revenue model for banks, fintech companies and other payment service providers. This could encourage competition based on service quality, reliability and value-added features, rather than relying primarily on transaction volumes and market share.
4. Reduced pressure on government finances: A revenue-based MDR framework can reduce the UPI ecosystem’s dependence on government-funded incentives to compensate banks and payment service providers for zero-MDR transactions.

Negative Impacts:

1. Higher costs for some merchants: The introduction of MDR will increase payment-processing costs for merchants undertaking specified higher-value UPI transactions. Although the charge is relatively small, it could affect businesses operating on thin profit margins, particularly in sectors with high transaction volumes.
2. Possible pass-through to consumers: Although the MDR is a merchant-side charge, some merchants may attempt to recover the additional cost from consumers by increasing prices or adding a separate payment fee.
3. Possible shift towards cash or alternative modes: Introducing merchant charges on certain higher-value UPI transactions could encourage some merchants to prefer cash or alternative digital payment methods to reduce transaction costs.

How are major instant payment systems around the world funded?

What should be the way forward?

1. Maintain affordability: UPI charges should be designed in a manner that preserves the affordability and convenience of digital payments, especially for low-value transactions and small merchants. The government should continue to keep essential, everyday payments free or minimally priced, while ensuring that any charges on higher-value transactions remain proportionate.
2. Protect small merchants: MDR framework should provide adequate exemptions or concessional rates for micro and small businesses. The government can also use transaction-value and turnover-based thresholds to ensure that larger businesses contribute more while small merchants remain protected.
3. Monitor impact on cash usage: The government and Reserve Bank of India should regularly assess whether merchant charges are encouraging businesses to shift from UPI towards cash or other payment modes. If evidence shows that charges are discouraging digital payments, the pricing structure could be reviewed, particularly for small businesses and low-margin sectors.
4. Gradually develop a sustainable pricing model: India should gradually move towards a financially sustainable pricing model for UPI without undermining its affordability and widespread adoption. Any charges should be proportionate to transaction value and the cost of providing the service. The government can periodically review MDR rates based on transaction volumes, ecosystem costs, and merchant profitability.
5. Balance sustainability with financial inclusion: The pricing framework should protect low-value transactions and small merchants, while ensuring that payment providers have adequate incentives to invest in a secure and reliable digital-payment ecosystem. This would help preserve UPI’s role as an instrument of financial inclusion, digitalisation and accessible payments.